U.K. covered bonds volumes rising but not likely to reach Spain and German levels

At this month's Information Management Network Barcelona conference, participants at the panel on covered bonds talked about the potential for increased issuance in the sector.

With supply in this market growing exponentially, the question at the panel was whether covered bond volume is close to reaching a limit. "There is a limit but that limit is huge," said one speaker. "We have hardly seen any issuance for paper that is dated below five years and for short-term maturities the limit is quite huge. Reducing maturities would deal with any limit problems we see at the longer end and if transactions end up that way, there is almost no limit." In Spain, for example, the preference for cedulas structures has been in longer dated maturities, although another speaker said that banks were prepared to come to market with shorter maturity offerings if it made sense.

Although the U.K. has come into its own over the years in the structured covered bond arena, it's unlikely to rival Spain and Germany in terms of issuance. David Balai, head of mortgage securitization and covered bonds at HBOS, said that at his firm, they are looking to increase the amount issued under structured covered bonds. "Over time, new issues will come and we could compete in terms of pricing and benchmark issues but not in terms of volumes," he said. "The U.K comes from a background of wanting to diversify."

Expected growth

More growth in the U.K. will come when mainstream lenders begin looking at covered bonds as a source of funding. Historically, the approach for funding has been via RMBS. With the implementation of Basel II, covered bonds could provide issuers with a cheaper alternative; though panelists said that, going forward, they did not believe that securitization would be excluded because issuers will still be looking for diversification.

The Financial Services Authority earlier this year added a level of clarity that should help boost volumes in the developing U.K. covered bond market. The regulator announced that it's considering new notification thresholds of covered bond issuance between 4% and 20% total assets (ASR, 03/13/06). These notification thresholds are viewed primarily as triggers for discussions between the FSA and the issuing firm. HBOS's Balai said that the FSA move should benefit his firm but the caps could cause some constraints for smaller players, where reaching a limit was more of an issue.